Kroger balks at buying stores from Walgreens-Rite Aid deal -source

By Lauren Hirsch and Diane Bartz

Oct (HKSE: 3366-OL.HK - news) 19 (Reuters) - Supermarket chain Kroger Co is questioning whether to proceed with buying divested stores from Walgreens Boots Alliance Inc (Frankfurt: W8A.F - news) as part of its proposed acquisition of Rite Aid Corp, a source familiar with the situation said on Wednesday.

Cincinnati, Ohio-based Kroger's hesitation casts uncertainty on the future of the $9.4 billion Walgreens-Rite Aid deal, which need approval from antitrust authorities, who have pushed back against a number of large deals this year.

The Federal Trade Commission (FTC) has told Kroger it would not have the option to close and integrate Rite Aid stores that are near Kroger locations, the source said. Kroger had concerns over the financial feasibility of such a set-up, as Rite Aid and Kroger have some overlap in products they sell, the source said, asking not to be named as the matter is confidential.

Kroger and Walgreens representatives declined to comment.

Walgreens said in early September it would likely have to divest between 500 and 1000 stores, more than its previous estimate, to win regulatory approval for its planned acquisition. Walgreen operates about 8,100 stores in the United States.

Kroger had indicated to Rite Aid it had an interest in buying some of the divested stores, the source said.

To be sure, it remains possible that other buyers, such as private equity firms, may step in to buy the stores if Kroger opts not to pursue a deal. It is not clear, however, whether another supermarket operator will step in, said David Balto, an antitrust attorney.

"An acquisition (of the divested assets) by a supermarket would be a substantial challenge because it's outside their normal area of expertise," he said.

"Pharmacies are the most competitive part of the health care system. Because of that, acquiring pharmacies may not be that attractive [for a grocery operator]" he added.

Walgreens said in October it would acquire smaller peer Rite Aid to widen its footprint in the United States and negotiate for lower drug costs.

The New York Post first reported on Kroger's concerns. (Reporting by Lauren Hirsch in New York and Diane Bartz in Washington DC; Editing by Jeffrey Benkoe)